AN economy in trouble has resulted not only in increased levels of fraud, but also greater incidents of fraud being discovered.
Consider the cases of Francisco Cruz who was recently (March 2013) convicted for a £12,500 veterinary insurance fraud; the office manager of a Plymouth practice who was convicted in 2012 for stealing £290,000 from her employers, nearly destroying the practice; or a former practice manager who in 2010 was also convicted for fraud against his employer.
But fraud can be dealt with.
The first option is to report the fraud to the police. An alternative, and probably better route, is to pursue the perpetrators of fraud through the civil courts.
A solicitor acting for a victim has a focus on recovering assets. The prosecuting authority’s primary interest is in securing a conviction, not compensation.
To illustrate the point, the case 4Eng Ltd shows how civil pursuit would have been more effective than reporting the fraud to the police.
4Eng Ltd v. Harper and Another
In 2001 4Eng Ltd purchased Excel Engineering from the defendants, Mr Harper and Mr Simpson. Excel was a company that provided engineering services primarily to Mars, the confectioner. 4Eng carried out due diligence in relation to Excel and the two directors of 4Eng put their life savings into the purchase.
Mr Harper and Mr Simpson, however, had for years been systematically defrauding Mars in a procurement fraud. With the collusion of Mars’ employees they created false works orders that were then signed off as completed and thereafter paid for by Mars.
Money was then extracted from Excel by way of fictional company invoices in order to make payments to the Mars conspirators. Occasionally the payments would be made by the provision of goods that had been purchased through Excel ostensibly for the business.
Soon after the purchase of Excel by 4Eng, the directors were approached by a Mars’ employee seeking confirmation that his bathroom would still be installed as agreed with the previous owners. This immediately prompted an investigation.
Solicitors entered into correspondence with Mr Harper and Mr Simpson and with their lawyers. Harper and Simpson denied any wrongdoing and ceased any contact with the directors. Eventually a report was made to the police in late 2002. The directors of 4Eng worked with the police on the investigation of the fraud.
The work was carried out by the directors at great personal cost: they worked extremely long days on the investigation and in trying to keep Excel afloat. The police said that they would be compensated in the criminal proceedings.
The directors also received similar assurances from the Attorney General. At the same time, the director of the Serious Fraud Office wrote to the directors dissuading them from bringing their own civil proceedings in case they prejudiced the outcome of the criminal proceedings.
Restraint orders
The police obtained restraint orders over the assets of the defendants in July 2005, three years after the defendants had been alerted to the investigation. In the intervening period they transferred assets to their family and a Guernsey company.
At the end of the criminal trial, counsel for the prosecution advised the directors that they should now issue their civil proceedings. They were not a victim under the terms of the indictment, that was Mars, and as such were not entitled to any criminal compensation.
4Eng obtained Summary Judgment and damages in excess of £8 million. Freezing Injunctions were obtained against Mr Harper and Mr Simpson. The SFO was persuaded to drop its claim for confiscation and the criminal judge decided not to make any order for compensation.
Proceedings were issued against the family of the defendants and the Guernsey company to unwind transactions intended to defraud creditors. Further injunctions were granted over some of their assets and they are also subject to onerous disclosure orders.
Steps which should have been taken
The first step should have been to secure the defendants’ assets and investigate without alerting the defendants.
An application without notice for a Freezing Order would have enabled the defendants’ assets to be frozen before they had any notice of proceedings.
To obtain a Freezing Injunction, the claimant must show a good arguable case and that there is a risk of dissipation of assets.
A degree of urgency must also be demonstrated if a without notice injunction is sought. If a without notice injunction is sought, the claimant has an onerous duty of full and frank disclosure of all material facts, including those which may harm its case.
Sufficient evidence to persuade the court of a good arguable case that fraud existed and to show a risk of dissipation could have been obtained at a very early stage, even though the full extent of the fraud on Mars was not discovered until well into the investigation. This would have frozen the defendants’ assets three years earlier than the Crown’s restraint order was obtained.
If this step had been taken it would almost certainly have prevented the transfers to the family and secured assets against which to enforce the judgment eventually obtained. This would also have saved the costs of the subsequent proceedings to unwind these transactions.
Disclosure orders also form part of the standard freezing injunction that requires the defendants to disclose their assets in a matter of hours. Any assets not discovered in the investigation can then be frozen.
A figure in respect of estimated costs can also be frozen, ensuring any costs orders made against the defendants in the proceedings can be recovered.
Admittedly, had no report been made there would not have been a conviction of the defendants, which undoubtedly was of assistance in the civil proceedings. However, a conviction only helps civil proceedings, as it amounts to evidence.
Another claim that was successfully made in the 4Eng case was a claim for management time for the time spent by the directors in the investigation. A detailed record should be kept and it is necessary to demonstrate that the time would otherwise have been spent on activities that would have made the claimant money.
Earlier action would undoubtedly have reduced the financial burden on 4Eng. Before costs escalated and the authorities were involved, there was a potential window to settle the claim. As soon as the police became involved the defendants ceased all co-operation.
